Oil prices rise as investors increase their bullish bets

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Crude futures moved higher Tuesday as investors held onto their bullish positions, betting on the supply to tighten as major oil producers cut their output. 

The April contract for global crude benchmark Brent  LCOJ7,  +1.44%    was up 91 cents, or 1.6%, to $57.09 a barrel while its U.S. counterpart West Texas Intermediate  CLH7,  +1.85%    gained 90 cents, or 1.7%, to $54.31 for March deliveries.

Trading activity has been muted in the early sessions of this week, according to Olivier Jakob from the Switzerland-based Petromatrix, and this is reflected in the timid price action of Monday.

 

Last week, hedge funds and other big money managers increased their net long position &mdash a bet on rising prices &mdash in Brent crude oil to the highest level since records started in 2011, the Intercontinental Exchange Inc. said Monday. This mirrors the U.S., where funds have raised their bullish bets to a fresh record. 

&ldquo There is no way that the U.S. can make up the differences.&rdquo Gordon Kwan, Nomura

 

Optimism in the market stems from a compliance rate of over 90% from a group of oil producers who have agreed to curtail their production. The pact, signed last year, calls for the group to cut their collective daily production by 1.8 million barrels. 

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This joint effort by the Organization of the Petroleum Exporting Countries and 11 other non-cartel producers is expected to push global oil prices to $60 a barrel by the end of the year, despite the growth in U.S. supply, said Gordon Kwan, the head of Asia oil and gas at Nomura.

Kwan pointed out that the world&rsquo s crude demand is expected to grow by 1.4 million barrels a day in 2017. Assuming that the OPEC-led initiative maintains a 90% compliance rate translating to around 1.5 million barrels a day, the market could see a combined shortage of 2.9 million barrels a day. 

&ldquo There is no way that the U.S. can make up the differences,&rdquo said Kwan, adding that despite the rise in oil drilling activities in the U.S., shale producers are expected to add at most around 1 million barrels a day to the market.

However, other analysts view U.S. oil as a real threat that could delay the market from rebalancing as drillers there have invested heavily to increase efficiency and reduce production costs. As the U.S. oil production balloons, so has its exports.

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BMI Research notes crude exports from the U.S. reached a record high in the week ended February 10, with most of the volume directed to Asia &mdash the fastest growing market and the longstanding battleground for OPEC nations.

In fact, OPEC&rsquo s top producers are prioritizing trades with Asia over the U.S. and Europe in order to maintain market shares, the firm added. 

&ldquo You can say the U.S. is the counterforce against OPEC,&rdquo said Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia.

Nymex reformulated gasoline blendstock for March  RBH7,  +0.06%    &mdash the benchmark gasoline contract&mdash fell 116 points to $1.5050 a gallon, while March diesel traded at $1.6465, 101 points higher.

ICE gas oil for March changed hands at $497.00 a metric ton, down $0.50 from Monday&rsquo s settlement.

&mdash Kevin Baxter contributed to this article.